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Sunday, January 11, 2009

Financial markets are still stressed. And given that Secretary Paulson has already appropriated TARP funds in excess of the first $350 billion, it is not surprising that Pres. Bush is drafting up a request for Congress to release the final $350 billion in TARP monies (with an interesting political tie to Obama). From the Washington Post:

Senior Bush administration officials, consulting with the Obama transition team, have prepared a plan to ask lawmakers for the second half of the $700 billion financial rescue package despite intense opposition in Congress, sources familiar with the discussions said.

The initiative could create an unusual political scenario straddling the Bush and Obama administrations. If Congress were to vote down the measure, either President Bush or Obama would have to exercise a veto to get the money.

Obama officials would prefer that Bush exercise any veto rather than leave the new president with the unsavory task of rebuffing his fellow Democrats in Congress to advance a widely unpopular program, sources said. The White House has declined to say publicly whether Bush would be willing to issue the veto.

"There have been discussions between the administration and the transition team on how to proceed should the president-elect determine that he would like President Bush to notify Congress on his behalf of the intent to use the remaining $350 billion so that it will be available early in the new administration," White House press secretary Dana Perino said. "No final decisions have been made."

But Democratic Senate aides were notified in a meeting yesterday afternoon that the request could come as soon as this weekend and that a vote could be held as early as next week, said congressional sources, who spoke on the condition of anonymity because no decisions have been made.

Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress turns down the request, the president could veto the resolution and then the Treasury could proceed. The money would be blocked only if Congress overrides the veto, which would require a two-thirds majority in both chambers.

The federal government should devote at least $50 billion of the remaining financial-rescue funds toward a plan to prevent foreclosures, said House Financial Services Committee Chairman Barney Frank Friday.

Wrapping up a week of efforts by legislators and businesses to stake claims on the Troubled Asset Relief Program and the proposed stimulus package, Mr. Frank said he plans to lay out a series of restrictions on the remaining $350 billion in TARP in a bill the House could vote on as soon as next week.Meanwhile, an industry coalition is lobbying for a tax break that would allow companies to renegotiate troubled debt without incurring corporate income taxes, a potential windfall for many companies, including private-equity firms.

Mr. Frank said his plan would prevent banks from using government money to buy healthy banks and impose tougher executive-compensation restrictions for new recipients of TARP funds. He is also proposing a permanent increase in the Federal Deposit Insurance Corp.'s insurance limit on deposit accounts to $250,000.

RW: But there is some scepticism in the financial sector, whose original problem - toxic assets held on bank balance sheets - has not gone away. And without the Treasury's original plan, buying up troubled assets (original TARP), banks will incur further capital losses on said assets with the worsening recession. This could in some sense negate the $267 billion capital injection to date. Some argue that by avoiding the underlying bank holdings of securitized assets, a capital injection just puts the overall problem into "hibernation". From Fortune:

Whatever the priorities in Congress, the bad asset problem isn't going away. Oppenheimer analyst Meredith Whitney warned in a report this week that she expects downgrades of mortgage-backed securities to hit bank profits in the soon-to-be-reported fourth quarter of 2008 - and to force the banks, which have already sold hundreds of billions of dollars in stock, to raise more capital.

Despite the shifting winds in Washington and the lack of attention the toxic asset problem is currently getting, Ryan [CEO of SIFMA, the Securities Industry and Financial Markets Association trade group and onetime director of the Resolution Trust Corp., or RTC] said he remains hopeful that legislators and administration officials will take appropriate action.

"We've been talking to all the right people, and they've been listening," Ryan said. "We think this new group can see the need to act."

RW: Frank's foreclosure initiative certainly tackles the heart of the problem, but is it really? In 1933, Congress authorized the Home Owners' Loan Corporation (HOLC) to purchase and refinance stressed home mortgages. HOLC was initiated with $200 million in funding, which is roughly $3.34 billion in 2008 (makes the $50 billion look worthwhile). Here is what Wheelock (2008) has to say about the effects of the HOLC's refinancing efforts:

It is difficult to determine the extent to which the HOLC contributed to a rebound in the housing market, let alone to the macroeconomic recovery. One study of countylevel data found little association between HOLC lending and changes in housing values or homeownership rates between 1930 and 1940 (Fishback, Horrace, and Kantor, 2001). Nevertheless, in helping to clear a million delinquent loans from the books of private lenders, the HOLC undoubtedly contributed to the resumption of private mortgage lending.

RW: The HOLC, or the government's efforts to tackle the foreclosures first-hand, did not significantly contribute to the recovery of the housing market, rather it freed up bank balance sheets. Today, the securitized industry was the mechanism that removed delinquent loans off of bank balance sheets. And now, many of those same banks are again holding on balance the delinquent loans in the form of mortgage-backed securities. This certainly gives some credence to the widely disputed original Troubled Asset Relief Program. This program would act in the same manner as did the original HOLC program: to get the bad assets off of bank balance sheets, and perhaps stimulate some new mortgage lending.

On the other hand, switching directions again at this point - turning to the asset purchase program and dumping the capital injection program - would probably heighten investor angst.

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comments:

(1) Between 1933 and 1935, the RFC purchased more than $1.7 billion in preferred stock in individual banks. To gauge the significant size of this agency's activity, in 1935 the total book value of equity capital (including the RFC investment) for all commercial banks was $3.6 billion (2) Hoover promised to press the Fed to broaden its narrow definition of what securities would be eligible for rediscount (that is, to lower the standard for what is acceptable as collateral for a loan from the Fed) (3) streamlining the procedures for reorganizing banks on the verge of insolvency (4) The RFC required that the bank make semi-annual dividend payments on the preferred stock. Eventually, the banks were to repurchase the RFC's preferred stock out of their future earnings after they had achieved a capital to deposit ratio of at least ten percent. (5) At various times, the RFC purchased bank preferred stock, made loans to assist agriculture, housing, exports, BUSINESS, governments (6) However, most RFC funding was obtained by borrowing from the TREASURY. During its years of existence, the RFC borrowed $51.3 billion from the Treasury, and $3.1 billion from the public. (7) Bankers became reluctant to borrow from the RFC, fearing that public revelation of a RFC loan would cause depositors to fear the bank was in danger of failing, and possibly start a panic (8) projects and programs instituted WITHOUT OBTAINING LEGISLATIVE APPROVAL. RFC lending did not was not reflected in the federal budget. (9) The RFC officials at times exercised their authority as shareholders to REDUCE SALARIES of senior bank officers, and on occasion, insisted upon a change of bank management (10) Another New Deal goal was to provide more funding for mortgages, to avoid the displacement of homeowners. The FHA would insure mortgage lenders against loss, and FHA mortgages required a smaller percentage down payment than was

I'm sure you know by now, but Bush agreed to seek the funds for Obama (1/12/09). I'm actually impressed by the way the two presidents are interacting and understanding each others roles and limitations.

I agree with the need to shake up the TARP program, as it has proven (so far) not to have made a lasting impression -- but I guess we can"t really say that for sure just yet.

What continues to get me is the ongoing and floundering game plan designed at foreclosure assistance. Strategy after strategy to prevent foreclosures has either failed, or hasn't met expectations. Why will this plan be any different? We recently published a story on short sales I think you could really get into (it scratches the surface on root causes, the latest strategies, and what we believe should be done to deal with the core issues).

Back to your post, but still talking about root causes: if troubled assets have been determined as a root cause, why was the strategy diverted upon so soon in the initiative?